(Article written in advance of the DOL fiduciary rule delay announcement)
By Gissou Gotlieb, Field Suitability Compliance Officer
The battle – a term not used in exaggeration here – continues over the fate of the Department of Labor’s fiduciary rule even though we are at its applicability date, April 10, 2017. Beyond the rule itself, what has been most challenging for many is the uncertainty about the viability of the rule (whether it will remain, get delayed, repealed, or changed) on top of the obstacles that must be overcome logistically and procedurally to be ready for business.
With all the back and forth of the rule being “certainly repealed” to “certainly staying”, to “certainly being delayed”, and then not, and then seeming to settle on the possibility of at least a 60-day delay, it is easy to see why some have thrown up their hands and not done much while waiting for something more concrete. However, for all those stuck on this rule specifically and the ones who are certain it will go away, I’d like to discuss a slightly different alternative, an alternative that some say is the real future of our industry, and that, if reviewed on its merits, is a very responsible, thoughtful, and reasonable one.
Regardless of what happens with this rule as currently written, the awareness and dialogue that the rule and the news around it have brought consideration of industry-wide changes in the future. A new way of doing business has been proposed and is being discussed. Consumers, regulators, legislators, and industry insiders have been advised of potential flaws and have opened avenues for improvement to better serve the public (which includes us and our loved ones). Here are some outcomes that are likely to result from all this discussion around acting in a fiduciary capacity:
1. Uniform Standard of Care:
Standard of care is the level of service and care that a consumer can expect to receive from their financial professional and institution. One of the concerns about the current rule is that, considering it came from the Department of Labor, it only addressed qualified funds that are a worker’s primary retirement funds. Financial institutions preparing for compliance with the rule are at a crossroads on how to treat non-qualified accounts/funds that are not subject to the rule. One could argue that the consumer should expect and receive consistent service and standards across all of their accounts, regardless of account type. For example, why would the consumer be entitled to know how their producer gets compensated for their retirement account, but when doing business with the same producer handling non-qualified funds, they would be subject to different paperwork, processes, and legalities, and their producer could be getting paid differently even for the same product? Moving forward, it could be argued that financial institutions need to handle all accounts and funds similarly.
2. Transparency in Compensation:
A major justification of the desire for producers to act in a fiduciary capacity was the perception that compensation is too high, in conflict with the interests of the consumer, and not always seemingly transparent. Financial firms are aware of the scrutiny that compensation brings and regardless of the outcome of this rule, both firms and consumers have become increasingly aware of issues surrounding compensation. Future trends most likely will include enhanced disclosure of compensation, as well as efforts by firms to work with product manufacturers to lessen differentials in compensation across products. Many firms are also signaling increasingly faster migration toward fee-based or trail compensation structures, lessening both the reliance and availability of up-front only commission structures.
Aside from actual commissions being paid, much buzz was created around some firms’ practice of incenting producers through “lavish” trips and/or other items of value that seemingly influenced the producer to act based on those incentives rather than what was in the benefit of the client. Trips, gifts, and other incentives that give the appearance of being lavish will be under more scrutiny by firms, and firms will likely shy away from production-based qualification for such incentives. Compensation of any kind will need to be accounted for and should not be (or seem to be) influencing the sale of a particular product type or company.
3. Coordination Between Regulatory Bodies:
Although the SEC had discussed implementing a “fiduciary” standard, the Department of Labor is the one who beat all other regulators to the punch in actually creating the rule. Because the financial industry is already highly regulated by various entities, the entrance of a new authority into this sphere presents many challenges for determining whose rules should be followed and what the pecking order is. Securities regulations govern the broker/dealers and registered representatives for securities-related products, while state insurance regulations govern the sale of insurance products and activities of insurance producers. One sale having multiple governing bodies always presents challenges, and one potential solution regardless of the DOL’s fiduciary rule is for the regulators and governing bodies to converge in a more active way towards regulation that is reasonable and practical while delivering on the goal of ensuring consumer protection and access to needed products and services.
Regulations are only as good as practiced (and enforced). Having regulations that are practically thought through to enable daily and effective practice will only result in more compliant behavior and processes. The easier it is for firms and producers to comply, the more likely it is that they will, and the consumer has a better opportunity to benefit from the rules’ implementation. Arguably, having fewer regulators involved in producing a more streamlined regulation with proper enforcement would help ensure better understanding and implementation of the rule and that is something from which the industry could benefit.
4. Oversight and Supervision:
Insurance is regulated by each state. The way in which business is done is very different than securities and advisory business, in that with insurance there is less centralized control and holistic monitoring of the producer. Most of the focus is around a particular transaction. One probable takeaway in the future is the incorporation of additional oversight or supervision measures into the insurance process. It is too soon to say what exactly this oversight or supervision will look like, but perhaps there will be more of an effort to understand and view, at some level, the producer’s business more comprehensively. This can be in the form of enacting additional controls on different ways the producer communicates, limiting how many marketing organizations are utilized, or other items that may yet be too soon to fathom.
Those of us who have been around for a while know that in business nothing is done until it is done, and even then it seems like things can be undone. So, without fretting about this fiduciary rule from the DOL, let’s keep our eyes on the future and what makes sense for our industry. Perhaps we can bridge society’s expectation of our services and products with the realities of how we do things to land in a place where everyone’s interests are more aligned and transparent. Change is inevitable – let’s work together to shape that change where it benefits everyone.
Gissou Gotlieb | Field Suitability Compliance Officer
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x134 | Dir: 734.786.6134
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